Financial Statements Caisse Desjardins du Nord de Sherbrooke

Transcription

1 Financial Statements Caisse Desjardins du Nord de Sherbrooke Transit No.: As at December 31, 2015

2 Contents Independent Auditor s Report Financial Statements Balance Sheets... 1 Statements of Income... 2 Statements of Comprehensive Income... 3 Statements of Changes in Equity... 4 Statements of Cash Flows

3 Independent Auditor s Report To the members of Caisse Desjardins du Nord de Sherbrooke, Report on the Financial Statements Pursuant to section 139 of the Act respecting financial services cooperatives (the Act), we have audited the accompanying financial statements of Caisse Desjardins du Nord de Sherbrooke (the Caisse), which comprise the Balance Sheets as at December 31, 2015 and 2014, and the statements of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2015 and 2014, and as a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards (IFRS), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, these financial statements present fairly, in all material respects, the financial position of the Caisse as at December 31, 2015 and 2014, and its financial performance and its cash flows for the years then ended, in accordance with IFRS. Report on a Legal Requirement In accordance with section 159(2) of the Act, we report that, in our opinion, IFRS have been applied in the same manner as in the previous year. 1 1 CPA auditor, CGA, public accountancy permit No. A Trois-Rivières (Québec), March 29, 2016 Desjardins Group Monitoring Office 2000, boulevard des Récollets, 2 e étage Trois-Rivières (Québec) G8Z 3X , ext Fax:

4 Balance Sheets As at December 31 (in thousands of Canadian dollars) Note Assets Cash $20,741 $26,603 Investments in the liquidity fund under management and other 64,618 61,731 85,359 88,334 Loans 5 Personal 842, ,332 Business 383, ,339 1,226,624 1,155,671 Allowance for credit losses 2,752 3,179 1,223,872 1,152,492 Other investments in the Federation 6 70,045 71,040 Other assets 7 26,675 29,780 96, ,820 Total assets $1,405,951 $1,341,646 Liabilities and equity Liabilities Deposits Term savings $440,995 $461,295 Other 611, ,534 1,052,856 1,023,829 Borrowings 9 200, ,121 Other liabilities 10 22,557 28, , ,595 Total liabilities 1,275,802 1,219,424 Equity Capital stock 13 18,434 24,859 Distributable surplus earnings 7,404 6,331 Accumulated other comprehensive income 2,213 3,280 Reserves 102,098 87,752 Total equity 130, ,222 Total liabilities and equity $1,405,951 $1,341,646 The accompanying notes are an integral part of the Financial Statements. 1

5 Statements of Income For the years ended December 31 (in thousands of Canadian dollars) Note Interest income $41,707 $41,990 Interest expense 14,169 14,938 Net interest income 27,538 27,052 Provision for credit losses ,233 Net interest income after provision for credit losses 26,809 25,819 Other income 14 13,133 12,876 Other expenses Employees 11 13,273 14,508 Assessments paid to Desjardins Group components 3,668 3,530 Computer services 5,602 5,554 Community development expenses General expenses 15 7,963 7,121 30,737 30,941 Operating surplus earnings 9,205 7,754 Income on other investments in the Federation 6 7,319 6,342 Income related to fair value of derivative financial instruments 1,985 1,012 Surplus earnings before taxes and member dividends 18,509 15,108 Income taxes on surplus earnings 12 3,127 2,404 Surplus earnings before member dividends 15,382 12,704 Member dividends 16 1,182 1,173 Tax recovery on member dividends 12 (318) (316) Net surplus earnings for the year after member dividends $14,518 $11,847 The accompanying notes are an integral part of the Financial Statements. 2

6 Statements of Comprehensive Income For the years ended December 31 (in thousands of Canadian dollars) Net surplus earnings for the year after member dividends $14,518 $11,847 Other comprehensive income, net of income taxes Items that will not be subsequently reclassified to the Statements of Income Remeasurement of net defined benefit plan liabilities 1,838 (2,766) Share of other comprehensive income attributable to the remeasurement of net defined benefit plan liabilities from investments in the Federation s investment funds 554 (2,167) 2,392 (4,933) Items that will be subsequently reclassified to the Statements of Income Share of other comprehensive income from investments in the Federation s investment funds (445) 1,600 Reclassification to the Statements of Income related to share of other comprehensive income from investments in the Federation s investment funds (622) (633) (1,067) 967 Total other comprehensive income 1,325 (3,966) Comprehensive income for the year $15,843 $7,881 The accompanying notes are an integral part of the Financial Statements. 3

7 Capital stock Distributable surplus earnings Appreciation reserve (investments in the Federation s investment funds) Appreciation reserve (derivative financial instruments) Appreciation reserve (employee benefit plans) General reserve Stabilization reserve Reserve for future member dividends Community development fund Total reserves Accumulated other comprehensive income (1) Total equity Caisse Desjardins du Nord de Sherbrooke Statements of Changes in Equity For the years ended December 31 Reserves (in thousands of Canadian dollars) Balance as at December 31, 2014 $24,859 $6,331 $27,709 $3,279 $(8,381) $56,539 $6,570 $1,414 $622 $87,752 $3,280 $122,222 Distribution by members at the 2015 general meeting Interest on permanent shares and on surplus shares - (1,203) (1,203) Transfer from (allocation to) reserves - (5,141) , , Net adjustment related to member dividends Balance after distribution 24,859-27,709 3,279 (8,381) 61,480 6,570 1, ,893 3, ,032 Net surplus earnings for 2015 after member dividends - 14, ,518 Other comprehensive income for the year - 2, (1,067) 1,325 Statutory transfer - (9,662) 6,116 1,446 2, , Net amounts used during the year (169) (169) - - Equity transactions related to other investments in the Federation - - (288) (288) - (288) Repurchase of permanent shares (5,999) (5,999) Other net change in capital stock (426) (426) Net adjustment related to member dividends - (13) (13) Balance as at December 31, 2015 $18,434 $7,404 $33,537 $4,725 $(6,281) $61,480 $6,570 $1,414 $653 $102,098 $2,213 $130,149 (1) Accumulated other comprehensive income mainly consists of the share of other comprehensive income from investments in the Federation s investment funds. The accompanying notes are an integral part of the Financial Statements. 4

8 Capital stock Distributable surplus earnings Appreciation reserve (investments in the Federation s investment funds) Appreciation reserve (derivative financial instruments) Appreciation reserve (employee benefit plans) General reserve Stabilization reserve Reserve for future member dividends Community development fund Total reserves Accumulated other comprehensive income (1) Total equity Caisse Desjardins du Nord de Sherbrooke Statements of Changes in Equity For the years ended December 31 Reserves (in thousands of Canadian dollars) Balance as at December 31, 2013 $28,337 $3,442 $25,093 $2,549 $(5,899) $54,764 $6,367 $1,414 $489 $84,777 $2,313 $118,869 Distribution by members at the 2014 general meeting Interest on permanent shares and on surplus shares - (1,184) (1,184) Transfer from (allocation to) reserves - (2,278) , , Net adjustment related to member dividends Balance after distribution 28,337-25,093 2,549 (5,899) 56,539 6,570 1, ,055 2, ,705 Net surplus earnings for 2014 after member dividends - 11, ,847 Other comprehensive income for the year - (4,933) (3,966) Statutory transfer - (730) 2, (2,482) Net amounts used during the year (167) (167) - - Equity transactions related to other investments in the Federation Change in shares held in the Federation s investment funds Issuance of permanent shares Repurchase of permanent shares (4,496) (4,496) Other net change in capital stock Net adjustment related to member dividends - (20) (20) Balance as at December 31, 2014 $24,859 $6,331 $27,709 $3,279 $(8,381) $56,539 $6,570 $1,414 $622 $87,752 $3,280 $122,222 (1) Accumulated other comprehensive income mainly consists of the share of other comprehensive income from investments in the Federation s investment funds. The accompanying notes are an integral part of the Financial Statements. 5

9 Statements of Cash Flows For the years ended December 31 (in thousands of Canadian dollars) Cash flows from (used in) operating activities Surplus earnings before taxes and member dividends $18,509 $15,108 Non-cash adjustments: Net provision for credit losses 357 1,038 Depreciation of property, plant and equipment Net defined benefit plan liabilities 1,391 1,371 Income related to recognition of derivative financial instruments at fair value (1,982) (1,012) Income on investments in the Federation s investment funds (7,128) (6,100) Changes in operating assets and liabilities: Net change in loans (71,737) (41,541) Net change in member deposits 30,960 12,602 Other changes (4,227) (117) Income taxes paid on surplus earnings during the year (1,407) (2,573) Member dividends paid (1,184) (1,679) (35,922) (22,218) Cash flows from (used in) financing activities Transactions related to borrowings: Net change in line of credit 3,399 (4,591) Net change in term borrowings 29,869 43,617 Issuance of permanent shares Repurchase of permanent shares (5,999) (4,496) Other net change in capital stock (426) 222 Remuneration on permanent shares and surplus shares (1,203) (1,184) 25,640 34,364 Cash flows from (used in) investing activities Acquisition of other investments in the Federation (2,616) (5,544) Amount received from the Federation s investment funds 1,565 1,440 Proceeds from the disposal of other investments in the Federation 8,374 1,425 Net change in investments (2,888) (4,423) Acquisition of property, plant and equipment (20) (132) Proceeds from disposal of property, plant and equipment 5 1 4,420 (7,233) Net increase (decrease) in cash (5,862) 4,913 Cash at beginning of year 26,603 21,690 Cash at end of year $20,741 $26,603 Supplemental information on cash flows from (used in) operating activities Interest paid $14,975 $15,383 Interest received 41,610 42,018 The accompanying notes are an integral part of the Financial Statements. 6

10 Note 1. Applicable legislation and types of operations The Caisse is a cooperative whose purpose is to receive the savings of its members in order to invest them profitably and to extend credit as well as to supply other financial products and services to its members. Its mission also includes fostering cooperation and promoting economic, social and cooperative education. It is governed by the Act respecting financial services cooperatives (the Act ). The Caisse is registered with the Autorité des marchés financiers (AMF) in Quebec. It is also a member of the Fonds de sécurité Desjardins, whose main purpose is to establish and administer a security, liquidity or mutual benefit fund for the benefit of the Desjardins caisses in Quebec. The Caisse is a member of the Fédération des caisses Desjardins du Québec (the Federation), which controls other components that form Desjardins Group. The address of the head office of the Caisse is 1845, rue King Ouest, Sherbrooke (Québec). The Board of Directors of the Caisse approved its Financial Statements for the year ended December 31, 2015 on March 29, Note 2. Basis of presentation and significant accounting policies Basis of presentation Statement of compliance Pursuant to the Act, these Financial Statements have been prepared by the Caisse in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), and the accounting requirements of the AMF, which do not differ from IFRS. Some figures from the prior year were reclassified to be consistent with the presentation of the financial statements of the current year. This reclassification did not affect the Caisse s surplus earnings or total assets and liabilities. Scope of the Caisse The Caisse participates in a Desjardins Business centre and the Desjardins Signature Service centre which is defined as a contractual agreement between caisses with the aim of sharing certain activities such as managing business loans and wealth management. Under the agreement, major decisions require the consent of the member caisses based on a double majority. On January 1, 2015, the administrative and loan collection activities of the Administrative Centre and Collection Centre in the caisse network in which the Caisse participated were transferred to a new component of the Federation, Desjardins Shared Services Group Inc. (DSSG). Significant judgments, estimates and assumptions The preparation of financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of certain assets, liabilities, income and expenses, as well as related information. The significant accounting policies that have required that management make difficult, subjective or complex judgments, often with regard to matters of an uncertain nature, concern determination of the fair value of financial instruments, derecognition of financial assets, the allowance for credit losses, objective evidence of impairment of available-for-sale securities, member dividends, provisions, impairment of non-financial assets including investments in the Federation s investment funds, income taxes on surplus earnings and employee benefits. Consequently, actual results could differ from these estimates and assumptions. 7

11 Note 2. Basis of presentation and significant accounting policies (continued) Functional and presentation currency These financial statements are presented in Canadian dollars, the Caisse s functional currency. The figures presented in the are in thousands of dollars, unless otherwise indicated. Significant accounting policies Financial assets and liabilities Financial assets and liabilities are recognized on the date the Caisse becomes a party to their contractual provisions. Classification and measurement Financial assets and liabilities are classified based on their characteristics and the intention of management upon their acquisition. Their classification in the categories defined by financial instrument standards is presented in Note 3, Carrying amount of financial instruments. Initial recognition refers to when the financial assets and liabilities are recorded in the Caisse s accounting records for the first time. Subsequent recognition is the accounting treatment applied in subsequent periods during which these assets and liabilities are recorded on the Balance Sheets. The classification of the financial assets held by the Caisse can be summarized as follows: Recognition Categories Initial Subsequent Financial assets held for trading (i) Fair value Fair value Loans and receivables (ii) Fair value Amortized cost Available-for-sale financial assets (iii) Fair value Fair value (i) Financial assets classified as Held for trading consist only of derivative financial instruments. (ii) Assets classified in the Loans and receivables category are measured at amortized cost using the effective interest method. Income recognized on these assets is presented under Interest income in the Statements of Income. Financial assets classified in this category include: cash; term deposits; loans. (iii) The Available-for-sale financial assets category is composed of the investment in the liquidity fund under management and investments in the Federation s General Fund. These investments are recognized at fair value, which corresponds to cost, taking into account the specific terms and conditions of the instruments. 8

12 Note 2. Basis of presentation and significant accounting policies (continued) The classification of financial liabilities can be summarized as follows: Recognition Categories Initial Subsequent Financial liabilities held for trading (iv) Fair value Fair value Financial liabilities at amortized cost (v) Fair value At amortized cost (iv) Financial liabilities classified as Held for trading consist only of derivative financial instruments. (v) Financial liabilities classified in the At amortized cost category are measured at amortized cost using the effective interest method. Interest expense on these liabilities is recognized under Interest expense in the Statements of Income. Financial liabilities classified in this category include: deposits; borrowings. Determination of the fair value of financial instruments The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as at the measurement date. If there are no quoted prices on active markets, fair value is determined using models that maximize the use of observable inputs and minimize the use of unobservable inputs. In such cases, fair value estimates are established using valuation techniques such as cash flow discounting, comparisons with similar financial instruments, option pricing models and other valuation techniques commonly used by market participants, if these techniques have been demonstrated to provide reliable estimates. Valuation techniques are based on assumptions concerning the amount and timing of estimated future cash flows and discount rates that are mainly based on observable data, such as interest rate yield curves, exchange rates, credit curves and volatility factors. When one or several material inputs are not observable on the market, fair value is determined mainly based on internal inputs and estimates that take into account the characteristics specific to the financial instrument and any factor relevant to the measurement. For complex financial instruments, significant judgment is exercised in determining the valuation technique to be used and in selecting inputs and adjustments associated with this technique. Due to the need to use estimates and make judgments, where appropriate, when applying many valuation techniques, fair value estimates for identical or similar assets may differ between entities. Fair value reflects market conditions on a given date and for this reason cannot be representative of future fair values. It also cannot be considered as being realizable in the event of immediate settlement of these instruments. Loans The fair value of loans is determined by discounting expected contractual cash flows using market interest rates charged for similar new loans at the reporting date and takes estimated prepayments into account. Changes in interest rates and in the creditworthiness of borrowers are the main causes of changes in the fair value of loans held by the Caisse, which results in a favourable or unfavourable difference compared to their carrying amount. The fair value of impaired loans is assumed to be equal to their carrying amount, in accordance with the valuation methods described below under Loans. 9

13 Note 2. Basis of presentation and significant accounting policies (continued) Deposits and borrowings The fair value of fixed-rate deposits and borrowings is determined by discounting expected cash flows using market interest rates currently being offered for deposits and borrowings with substantially the same term and takes estimated prepayments into account. The fair value of deposits and borrowings with floating-rate features or with no stated maturity is assumed to be equal to their carrying amounts. Derivative financial instruments The fair value of derivative financial instruments is determined using pricing models that incorporate the current market prices and the contractual prices of the underlying instruments, the time value of money, interest rate yield curves, credit curves and volatility factors. Financial instruments whose fair value equals the carrying amount The carrying amount of certain financial instruments that mature within the next 12 months is a reasonable approximation of their fair value. These financial instruments include the following items: Cash, some Other assets and some Other liabilities. Transaction costs Transaction costs for financial instruments are capitalized and then amortized over the life of the instrument using the effective interest method, except if such instruments are classified in the Financial assets held for trading category, in which case these costs are expensed as incurred. Offsetting financial assets and liabilities Financial assets and liabilities are presented on a net basis when there is an unconditional and legally enforceable right to set off the recognized amounts and the Caisse intends to settle on a net basis or to realize the asset and settle the liability simultaneously. Derecognition of financial assets and liabilities A financial asset is derecognized on the Balance Sheets when the contractual rights to the cash flows from the asset expire or when the contractual rights to the cash flows from the asset are retained but the Caisse has the obligation to pay these cash flows to a third party, under certain conditions, or when the contractual rights to the cash flows from the asset are transferred and substantially all risks and rewards incidental to ownership of the asset have been transferred. When the Caisse has retained substantially all the risks and rewards incidental to ownership of the financial asset transferred, the asset continues to be recognized on the Balance Sheets and, if required, a financial liability is recognized. When a financial asset is derecognized in its entirety, a gain or a loss is recognized in the Statements of Income for an amount equal to the difference between the carrying amount of the asset and the value of the consideration received. The Caisse s management must use its judgment to determine if the contractual rights to the cash flows from the asset have expired, have been transferred or have been retained with the obligation to pay these cash flows to a third party. In the event of the transfer of substantially all the risks and rewards, management will assess the Caisse s exposure before and after the transfer, as well as the change in the amount and timing of the net cash flows related to the transferred asset. Lastly, the Caisse s management must exercise judgment in measuring the rights retained. 10

14 Note 2. Basis of presentation and significant accounting policies (continued) A financial liability is derecognized when the related obligation is discharged, cancelled or expires. The difference between the carrying amount of the financial liability transferred and the consideration paid is recognized in the Statements of Income. Cash Cash includes cash on hand and other amounts used in current operations. These financial instruments are classified as Loans and receivables. Investments Investments may include the investment in the liquidity fund under management and term deposits. To manage liquidity risk, the Caisse keeps the amounts necessary to maintain a minimum level of liquidity in a fund under management designed specifically for this purpose. The amounts paid into this fund are excluded from cash because regulations prohibit their use in current operations. The investment in the liquidity fund is therefore classified in the Available-for-sale financial assets category. Term deposits are classified as Loans and receivables. Loans Loans are recorded at amortized cost using the effective interest method, net of the allowance for credit losses. The fees collected and the direct costs related to the origination, restructuring, and renegotiation of loans are treated as being an integral part of the return on the loan. They are deferred and amortized using the effective interest method, and amortization is recognized under interest income for the term of the loan. Other investments in the Federation Investments in the Federation s investment funds The Caisse holds various participating securities of the Federation. It holds securities in a number of investment funds issued by the Federation which entitle the Caisse to the return from Desjardins Group subsidiaries. Since the Caisse is able to exercise significant influence over the Federation s financial and operational policy decisions, the investments are accounted for using the equity method. Under this method, the investments are initially recognized at cost and subsequently adjusted to reflect the changes in the Caisse s share of the equity of the Federation s investment funds that occur after the investments are acquired. The income from these investments is presented in the Statements of Income under Income on other investments in the Federation. Investments in the Federation s General Fund The Caisse has shares of capital stock as well as Series A, B, C and D capital shares issued by the Federation, which are investments in the Federation s General Fund. Since these shares do not entitle holders to any return from the Federation, holdings of these securities are classified as available-forsale financial assets, and are therefore recognized at fair value. Given the specific characteristics of these shares, fair value corresponds to cost. Interest income from these investments is recorded when the right to such income is established by the Federation. This income is presented in the Statements of Income under Income on other investments in the Federation. 11

15 Note 2. Basis of presentation and significant accounting policies (continued) Impairment of financial assets Impaired loans At the reporting date, the Caisse assesses whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A loan is considered impaired if there is evidence of impairment, more specifically if one of the following conditions is met: There is reason to believe that a portion of the principal or interest will not be able to be collected. The interest or principal is contractually 90 days past due, unless the loan is fully secured and in the process of collection. The interest or principal is more than 180 days past due. A loan is not classified as impaired when it is fully guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency. A loan is considered past due as soon as the borrower has failed to make a payment by the contractual due date. When a loan becomes impaired, the interest previously accrued but not collected is capitalized to the loan. Payments received subsequently are recorded as a deduction of the principal. A loan ceases to be considered impaired when principal and interest payments are up to date and there is no doubt as to the collection of the loan or when it is restructured, in which case it is treated as a new loan, and there is no longer doubt as to the collection of the principal and interest. Assets foreclosed to settle impaired loans are recognized on the date of foreclosure at their fair value less costs of disposal. The fair value of foreclosed assets is determined by using a comparative market analysis, based on the optimal use of the assets, as well as the characteristics, location and market of each foreclosed asset. Transaction prices for similar assets are used and certain adjustments are made to take into account the differences between assets on the market and the foreclosed assets measured. If the fair value of the acquired assets is less than the carrying amount of the loan, the loss is recognized under Provision for credit losses. In the opposite case, the difference is accounted for under Provision for credit losses up to the allowance already recognized, and any surplus is recognized under General expenses. A loan is written off when all possible attempts at restructuring or collection have been made and the likelihood of future collection is remote. When a loan is written off completely, any subsequent payments are recognized under Provision for credit losses in the Statements of Income. Allowance for credit losses Objective evidence of impairment results from a loss event that occurred after the loan was granted but before the reporting date and that has an impact on the estimated future cash flows of loans. The impairment of a loan or a group of loans is determined by estimating the recoverable amount of these financial assets. The allowance is equal to the difference between this estimate and the carrying amount. This allowance is presented in deduction of loans under Allowance for credit losses. To determine the estimated recoverable amount of a loan, the Caisse uses the value of the expected future cash flows discounted at the loan s original effective interest rate. When the amounts and timing of future cash flows cannot be estimated with reasonable reliability, the estimated recoverable amount is determined using the fair value of the securities underlying the loan, net of expected costs of realization. 12

16 Note 2. Basis of presentation and significant accounting policies (continued) The allowance for credit losses is Caisse management s best estimate of impaired loans as at the reporting date. In measuring the allowance for credit losses, Caisse management must exercise judgment in order to determine the inputs, assumptions and estimates to be used, including the timing when a loan is considered impaired and the recoverable amount. A change in these estimates and assumptions would affect the allowance for credit losses, as well as the provision for credit losses for the year. The allowance for credit losses relating to impaired loans is measured on an individual basis, while the allowance for credit losses is measured on a collective basis for unimpaired loans. Individual allowances The Caisse reviews its loan portfolios on a loan-by-loan basis to assess credit risk and determine if there is any objective evidence of impairment for which a loss should be recognized in the Statements of Income. Changes in the individual allowance for credit losses due to the passage of time are recognized under Interest income, while those that are due to a revision of expected receipts are recognized under Provision for credit losses in the Statements of Income. Collective allowance Loan portfolios for which there is no objective evidence of impairment are included in groups of financial assets with similar credit risk characteristics and are subject to a collective allowance. The method used by the Caisse to determine the collective allowance takes into account the risk parameters of the various loan portfolios, in particular through the integration of sophisticated credit risk models. These collective allowance models take into account certain factors such as probabilities of default (loss frequency), loss given default (extent of losses) and gross exposures at default. These parameters, which are based on historical losses, are determined according to the category and the risk rating of each loan. The measurement of the collective allowance also depends to a large extent on management s judgment and its assessment of current credit quality trends with respect to business segments, the impact of changes to its credit policies and economic conditions. Finally, the allowance related to off-balance sheet exposures, such as letters of guarantee and certain unrecognized credit commitments, is recognized under Other liabilities on the Balance Sheets and under General expenses in the Statements of Income. Property, plant and equipment Property, plant and equipment may include land, buildings, equipment, furniture and other items as well as leasehold improvements. These assets are recognized at cost less any accumulated depreciation and any impairment losses, and are depreciated based on the estimated useful life of each of their significant parts, using the straight-line method. 13

17 Note 2. Basis of presentation and significant accounting policies (continued) Depreciation Property, plant and equipment are depreciated using the following depreciation periods. Depreciation periods Land Buildings Equipment, furniture and other Leasehold improvements Non-depreciable 15 to 60 years 2 to 20 years 5 to 20 years Depreciation expense is recognized under Other expenses in the Statements of Income. Assets held for sale An asset is classified as held for sale if its carrying amount is expected to be recovered primarily through a sale transaction rather than through continuing use, and such a sale transaction is highly probable. An asset held for sale is measured at the lower of its carrying amount and its fair value less costs of disposal. The fair value of assets held for sale is determined by using a comparative market analysis, based on the optimal use of the assets, as well as the characteristics, location and market of each asset. Transaction prices for similar assets are used and certain adjustments are made to take into account the differences between assets on the market and assets held for sale. Impairment of non-financial assets The Caisse assesses at the reporting date whether there is evidence that an asset must be impaired. An impairment loss is recognized when the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of its fair value less costs of disposal and its value in use. Fair value corresponds to the best estimate of the amount that may be obtained from the disposal of an asset during an arm s length transaction between knowledgeable, willing parties. The value in use is calculated according to the most appropriate method, generally by discounting recoverable future cash flows. Impairment losses on that asset may be subsequently reversed and are recognized in the Statements of Income in the year in which they occur. Estimating the recoverable amount of a non-financial asset to determine if it is impaired requires also that management make estimates and assumptions, and any change in these estimates and assumptions could impact the determination of the recoverable amount of non-financial assets and, therefore, the outcome of the impairment test. Deposits and borrowings Deposits and borrowings are financial liabilities classified as Financial liabilities at amortized cost. Interest expense calculated using the effective interest rate is recognized in profit or loss for the year under Interest expense. 14

18 Note 2. Basis of presentation and significant accounting policies (continued) Provisions Provisions are liabilities of uncertain timing or amount. Provisions are recognized when the Caisse has an obligation (legal or constructive) as a result of past events, the settlement of which should result in a disbursement by the Caisse and when a reliable estimate can be made of this amount. The amount of the expected disbursement is discounted where the effect of the time value of money is material. Provisions are based on management s best estimate of the amounts that will be necessary to settle the obligation at the end of the reporting period, in view of relevant risk and uncertainties. Given the prospective nature of these estimates, management must use its judgment to determine the timing and the amount of future cash flows. Actual results could be significantly different from forecasts. Derivative financial instruments Derivative financial instruments are financial contracts whose value depends on assets, interest rates, foreign exchange rates and other financial indexes. Derivative financial instruments are negotiated by mutual agreement between the Caisse and the counterparty and include interest rate swaps, foreign exchange contracts and stock index options. The Caisse recognizes derivative financial instruments at fair value, whether they are stand-alone or embedded. Stand-alone derivative financial instruments are recognized on the Balance Sheets under other assets and liabilities, while embedded derivative financial instruments are presented with their host contract depending on the type of instrument, under Term savings. Changes in the fair value of stand-alone derivative financial instruments are recognized under Income related to fair value of derivative financial instruments in the Statements of Income. Moreover, changes in the fair value of embedded derivative financial instruments are recognized as interest expense adjustments. The Caisse essentially uses derivative financial instruments for purposes of asset and liability management. Derivative financial instruments are mainly used to manage the interest rate risk exposure of the assets and liabilities recorded on the Balance Sheets, firm commitments and forecasted transactions. Interest rate swaps are transactions in which two parties exchange interest flows on a specified notional amount for a predetermined period based on agreed-upon fixed and floating rates. Principal amounts are not exchanged. The foreign exchange contracts to which the Caisse is a party are forward exchange contracts. Forward exchange contracts are commitments to exchange, at a future date, two currencies based on a rate agreed upon by both parties at the inception of the contract. The Caisse has elected not to apply hedge accounting for these derivative financial instruments, given the complexity of documentation requirements. Distributable surplus earnings Distribution comes under the jurisdiction of the general meeting. However, according to the standards of the Federation, distributable surplus earnings must be applied first for the purpose of ensuring the payment of interest on permanent shares, as well as for the purpose of establishing or maintaining the required level of capitalization through transfers to the stabilization reserve and the general reserve. 15

19 Note 2. Basis of presentation and significant accounting policies (continued) Reserves The appreciation reserve consists of the following three components: The Appreciation reserve Investments in the Federation s investment funds is comprised of uncollected income generated by shares of Desjardins subsidiaries accounted for using the equity method. The Appreciation reserve Derivative financial instruments comprises gains and losses resulting from the change in net fair value of derivative financial instruments. The Appreciation reserve Employee benefit plans includes the Caisse s share of the actuarial deficit of the common pension and group insurance plans. The general reserve is made up of amounts appropriated by the Caisse, according to the conditions stipulated in the standards. This reserve can be used only to eliminate a deficit and cannot be divided amongst members or used to pay a member dividend. The stabilization reserve consists of amounts appropriated by the Caisse. Amounts appropriated to the stabilization reserve are essentially used for the payment of interest on permanent shares when the surplus earnings of the Caisse are not sufficient. The reserve for future member dividends is made up of amounts appropriated by the Caisse. This reserve allows it to manage over time the impact of changes in annual surplus earnings on the payment of member dividends. The community development fund is a reserve that includes the amounts allocated by the general meeting. The amounts recorded in these accounts are to be used to assist in community development, according to the conditions stipulated in the Caisse s normative framework. Revenue recognition Revenues are recognized to the extent that it is probable that the economic benefits will flow to the Caisse and that they can be measured reliably. In addition to the items mentioned previously in Financial assets and liabilities, the specific recognition criteria that follow must also be met before revenues can be recognized. Net interest income Interest income and expense are recognized using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that accurately discounts future cash payments or receipts through the expected life of the financial instrument or, when appropriate, over a shorter period to obtain the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Caisse estimates cash flows considering all contractual terms of the financial instruments (for example, prepayment options) but does not consider future credit losses. The calculation includes transaction costs and income between parties to the contract as well as premiums or discounts. Transaction costs and income that form an integral part of the effective rate of the contract, such as file set-up fees and finders fees, are assimilated to supplemental interest. 16

20 Note 2. Basis of presentation and significant accounting policies (continued) Other income The Caisse collects income from deposit administration, administration of other services and distribution of Desjardins products and services. Income from deposit administration consists mainly of service charges and charges related to payment orders issued without sufficient funds, while income from the administration of other services is made up of charges relating to collections made on behalf of various organizations, and of income from intercaisse transactions. This income is recognized when the transaction is carried out based on the agreement in effect with the member. Income from the distribution of Desjardins products and services comprises fees for the financial activities carried on by Desjardins Group subsidiaries through the Caisse. This income is recognized when the service is rendered, based on the agreements in effect with the various Desjardins Group subsidiaries. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate prevailing at the reporting date. Non-monetary assets and liabilities are translated at historical rates. Income and expenses are translated at the average exchange rate for the period. Realized and unrealized gains and losses resulting from the translation are recognized in the Statements of Income under Other income. Leases Leases under which the lessor retains substantially all the risks and rewards incidental to ownership of an asset are known as operating leases. However, leases under which there is a transfer of substantially all the risks and rewards incidental to ownership of an asset are known as finance leases. Lessee Lease payments made under operating leases are recognized as an expense on a straight-line basis until the end of the lease. Under a finance lease, an asset and a liability of an equivalent amount are recognized at the lower of the fair value of the asset acquired or the present value of minimum lease payments. The asset is presented on the Balance Sheets under Other assets, while the corresponding liability is presented on the Balance Sheets under Other liabilities. A depreciation expense is recognized in profit or loss on a straight-line basis over the lease period, while an interest expense is recognized in profit or loss under General expenses based on the lease s effective interest rate. Lessor Lease income from operating leases is recognized as income on a straight-line basis until the end of the lease. 17

21 Note 2. Basis of presentation and significant accounting policies (continued) Income taxes on surplus earnings The income tax expense on surplus earnings recognized in the Statements of Income includes the current and deferred income tax expense on operating surplus earnings as well as the tax consequences of remuneration on capital stock when certain conditions are met. The total income tax expense includes the income tax expense on surplus earnings in the Statements of Income and the current and deferred income tax expense related to items that are not recognized in profit or loss but directly in the Statements of Comprehensive Income or the Statements of Changes in Equity. The total of income tax expense is based on the expected tax treatment of the transactions. To determine the current and deferred portions of income taxes on surplus earnings, management must exercise its judgment to make assumptions concerning the dates on which deferred income tax assets and liabilities will be reversed. Significant judgment must be exercised to interpret the relevant tax legislation to determine the income tax expense. If the Caisse s interpretation differs from that of the taxation authorities or if the reversal dates do not correspond to the forecasted dates, the provision for income taxes on surplus earnings may increase or decrease in subsequent years. Current income taxes Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. Tax rules and tax rates applied to determine these amounts are those that have been enacted or substantively enacted as at the reporting date. Deferred income taxes Deferred taxes are recognized, using the liability method, for all temporary differences existing as at the reporting date between the tax basis of assets and liabilities and their carrying amount on the Balance Sheets. The carrying amount of a deferred tax asset is reviewed at each reporting date and reduced to the extent that it no longer seems probable that sufficient taxable profit will be available to allow the benefit of all or part of that deferred tax asset to be utilized. Unrecognized deferred tax assets are remeasured at each reporting date and are recognized to the extent that a future taxable benefit may likely allow them to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax rules) that have been enacted or substantively enacted as at the reporting date. Member dividends The Board of Directors of the Caisse recommends for approval the surplus earnings distribution plan at the annual general meeting, which is held within four months following year-end. The amount of member dividends to be paid is part of this plan. The amount of the provision is determined in particular based on the surplus earnings recorded for the year taking the normative framework into consideration. The difference between the amounts of member dividends actually paid in cash following the general meeting held by the Caisse, and the estimated amount of the provision is charged to profit or loss for the period in which the payments are made. The allocation basis of member dividends depends on the interest recorded on loans and deposits, the average outstanding amount of Desjardins investment funds, guaranteed market-linked investments, Accord D financing obtained by the member through the Caisse, and the various service charges collected from the member depending on the services used. 18

22 Note 2. Basis of presentation and significant accounting policies (continued) Employee benefits Short-term benefits Short-term benefits include salaries and commissions, social security contributions and certain bonuses payable within 12 months after the reporting date. An expense is recognized for these short-term benefits in the period during which the services giving right to these benefits were rendered. Post-employment benefits Pension and post-retirement benefit plans The Caisse offers the majority of its employees a pension plan as well as a supplemental pension plan that are defined benefit plans. The Caisse also offers a post-retirement benefit plan, including medical, dental and life insurance coverage to retiring employees and their dependants. The cost of these plans is recognized in the Statements of Income and consists of current service cost, past service cost and net interest on net defined benefit plan liabilities. Past service cost arising from an amendment to or reduction in the plans is recognized immediately in the Statements of Income. Remeasurements of net defined benefit plan liabilities are recognized in other comprehensive income that will not be subsequently reclassified to the Statements of Income and are recorded immediately in distributable surplus earnings. Remeasurements of net defined benefit plan liabilities include actuarial gains and losses as well as the difference between the actual return on plan assets and the interest income generated by the assets recognized in the Statements of Income. Actuarial gains and losses result from the changes made to the actuarial assumptions used to determine the defined benefit plan obligation and the experience gains or losses with regard to this obligation. The net defined benefit plan assets or liabilities correspond to the present value of the obligation of these plans, computed according to the projected unit credit method, less the fair value of plan assets. The value of any defined benefit plan asset, when appropriate, is limited to the present value of any economic benefits available in the form of refunds from the plans or reductions in future contributions to the pension plans. The pension plan net liabilities and the net liabilities related to the post-retirement benefit plan are recognized under Net defined benefit plan liabilities or Other liabilities on the Balance Sheets. The Caisse participates in group defined benefit pension plans of which the risks are shared by entities under common control. The Caisse s share of the recognized costs and of Desjardins Group s net group defined benefit plan liabilities is mainly determined by funding rules, as described in the Desjardins Group Pension Plan Regulation. Desjardins Group s main pension plan is funded by both employee and employer contributions, which are determined based on the financial position and the funding policy of the plan. Employer contributions are determined using a percentage of the assessable payroll for their employees participating in the plan. The Caisse s share of the cost of Desjardins Group s group post-retirement benefit plan is based on the number of the Caisse s active insureds as a percentage of the total number of active insureds for Desjardins Group as a whole. 19